Bankruptcies are back in force as UK businesses are no longer on life support
Since the start of the pandemic, Rishi Sunak’s furlough scheme, Covid loans and corporate rate relief have allowed bosses to put businesses into hibernation. Creditors, meanwhile, have been rendered temporarily powerless by a moratorium on legal action to demand repayment of debts.
But with the support ending, business bankruptcies more than doubled to 1,488 in January from a year earlier. Personal insolvencies only increased by 1.8%.
“There are deep-rooted challenges to the UK economy,” says Colin Haig, head of restructuring at accountancy firm Azets. “There are a number of supply chain issues. There are inflationary pressures on the economy. And what’s happening in Eastern Europe is shaking people’s marginal propensity to spend.
With the exception of owners, creditors can now serve owners with a petition for liquidation.
Haig adds: “The restriction that was put in place around debt collection has been lifted and credit controllers are inserting liquidation petitions as a technique to get paid.
“[Banks] are more conservative than they were a short time ago because they are not blind to other pressures in the economy. They are therefore very judicious in granting new funds.
From March 25, donors will also be unleashed. While they won’t be able to make legal demands for unpaid rent during the pandemic, they will be able to serve a liquidation petition for future payments.
During the pandemic, many large companies have taken the opportunity to strengthen their balance sheets by taking out loans with interest rates persisting at record lows.
Small businesses were less fortunate. “Small and medium-sized businesses face varying dynamics, and many are likely to face financial pressures as government-backed programs are rolled back,” says Joseph Swanson, co-head of restructuring at Houlihan Lokey. .
He adds: “We are starting to see an incipient uptick in distressed activity after a benign year. Inflation and supply chain challenges [are] exacerbating already precarious situations.
According to Will Wright, managing director of Interpath Advisory, KPMG’s former restructuring firm, the worst is yet to come.
“We’re still in this phase of anticipating what’s to come,” he says. “Despite recent high-profile cases, there is yet to be widespread enforcement by creditors. There is definitely an increase in activity. But the big challenge is that many of these companies don’t know what the new normal will look like.
“There’s inflation, supply chain challenges and worries about what the future of consumer demand will look like. All of this mixed in a pot is creating a lot of confusion.”
Even companies that have tapped into debt markets for ultra-cheap debt during the pandemic could still face difficulties as central banks raise interest rates, Swanson warns.
“There are still a number of highly indebted companies in, for example, the energy, industrials and consumer sectors that are likely to face refinancing challenges, particularly in the context of ‘a higher rate environment.’
All of this paints a bleak picture. With UK businesses off life support, businesses large and small could soon suffer widespread cardiac arrests.